Chapter 7 vs. Chapter 13 Bankruptcy
Most individuals who file bankruptcy use one of two chapters of the federal Bankruptcy Code. Both stop collection through the automatic stay the moment you file, halting most lawsuits, wage garnishments, foreclosures and collection calls. They work very differently after that.
Chapter 7: "liquidation" or a fresh start
- How it works: a trustee reviews your assets and may sell any that aren't protected by exemptions to pay creditors. In practice, most Chapter 7 cases are "no-asset" cases where everything the filer owns is exempt. See what you can keep in bankruptcy.
- Timeline: usually a few months from filing to discharge.
- Who qualifies: you must pass the means test. If your income is below your state's median for your household size you generally qualify; above it, a more detailed calculation of disposable income applies.
- Result: most unsecured debts, such as credit cards, medical bills and personal loans, are discharged.
Chapter 13: a repayment plan
- How it works: you keep your property and repay some or all of your debts through a court-approved plan lasting three to five years, making monthly payments to a trustee.
- Who uses it: people with income too high for Chapter 7, people who want to catch up on a mortgage or car loan to stop foreclosure or repossession, and people with property they'd lose in Chapter 7.
- Result: at the end of the plan, remaining eligible debts are discharged. Debt limits apply to who can file.
Debts neither chapter usually erases
Most child support and alimony, most recent taxes, most student loans (unless you prove undue hardship, a process that has become somewhat more accessible in recent years), criminal fines and restitution, and debts from fraud or drunk-driving injuries.
Side by side
| Chapter 7 | Chapter 13 | |
|---|---|---|
| Length | A few months | 3 to 5 years |
| Income test | Means test | Must have regular income |
| Keep non-exempt property? | Not necessarily | Yes |
| Stops foreclosure long-term? | Usually only delays | Can cure arrears over the plan |
| Credit report | Up to 10 years | Up to 7 years |
Before you file
Federal law requires a credit counseling course from an approved provider before filing and a debtor education course before discharge. Avoid moving assets around, paying back family members, or running up new debt right before filing; trustees can undo those transactions.
Many bankruptcy attorneys charge a flat fee for Chapter 7 and take Chapter 13 fees partly through the plan. Find a bankruptcy attorney near you.
This guide is general information, not legal advice. Bankruptcy is federal law, but exemptions and median-income figures depend on your state.